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New Clearing Rules to Benefit CME - Analyst Blog

Yesterday,
CME Group Inc.
(
CME
) announced the receipt of regulatory approval for reducing its
portfolio margins within the clearing and cross-selling of
interest rate futures and over-the-counter derivatives. This
approval seeks to bring in cost synergies for the company and new
business for clearing services offered by it.

November 19, 2012 onwards, CME Group will be able to allow
different types of trading firms and hedge fund managers to pool
their trades in diverse products in a single basket. These
products include interest rate swaps (IRS), Treasury futures and
Eurodollar futures, among others. In March this year, the company
commenced the offering of portfolio margining services to the
banks such as
JPMorgan Chase & Co.
(
JPM
).

Previously, these contracts were traded individually with less
collateral as some IRS would be offset with its futures'
position. This process was also adding to the cost of the
company. Thus, the latest regulation will compel traders to back
all the contracts by the required collateral but with reduced
initial margins, thereby enhancing capital efficiencies for CME
Group and traders.

The new rules also impel the traders to get their contracts
cleared by the authorized clearinghouses, which also includes
CME's clearinghouse. Hence, this rule will allow the company to
tap the $400 trillion clearinghouse business.

Additionally, the portfolio margining will generate
transparency and manage risk effectively, which is expected to be
beneficial to the customers. The technological upgrade and a
central clearing will mitigate the risk and reduce margin
requirements, thus augmenting the scope for cost synergies.

Growth remains a huge driver for CME Group. While the company
has been expanding its IRS clearing portfolio, last week it also
received the due approval from the regulatory bodies in London to
launch its currency futures in Europe as well.

CME Group has already been operating its clearinghouse in
London since May last year. The company now intends to launch 30
new currency futures by June 2013. CME Group also plans to
initiate more products in other asset classes in the future.

We believe these positives should drive growth in the
company's IRS portfolio primarily due to the ongoing interest
rate volatility in the global economy. Additionally, such
products enhance transparency and risk-management features to the
trading, which should help in gaining the confidence and
attracting the untapped customer-base.

The latest offering will further enhance CME Group's market
retention capacity in the presence of arch-rivals such as
NYSE Euronext Inc.
(
NYX
) and
IntercontinentalExchange Inc.
(
ICE
), also reflecting sound utilization of its capital.

CME Group carries a Zacks Rank #4 that implies a short-term
Sell rating, while the long-term recommendation stands at
Neutral.

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